Saudi Arabia is deploying the most oil rigs in four years as it prepares for possible shortages caused by tension with Iran, giving President Barack Obama one less reason to answer calls to curb prices by releasing supplies from America’s emergency reserves.

The number of rigs used in the desert kingdom more than doubled in January from a year earlier, the biggest annual increase on record, data from Houston-based Baker Hughes Inc. (BHI) showed. As much as 1 million barrels a day of Iranian crude exports may be lost as the U.S. and Europe tighten sanctions against President Mahmoud Ahmadinejad’s government over its nuclear program, the International Energy Agency said Feb. 10.

March 1 (Bloomberg) -- Christoph Eibl, founding partner of Tiberius Asset Management, talks about outlook for gold and oil prices. He speaks with Erik Schatzker on Bloomberg Saudi Arabia used 49 rigs in January, compared with 48 in December and 23 a year earlier.

Saudi Arabia used 49 rigs in January, compared with 48 in December and 23 a year earlier. Brent, the benchmark for more than half the world’s oil, rose to a 10-month high Feb. 24, propelling U.S. retail gasoline to the highest ever for this time of year. Democrats urged Obama last week to tap the nation’s Strategic Petroleum Reserve for the 18th time since 1985. Iran’s buyers in Asia and the European Union are cutting purchases to comply with sanctions, raising demand for alternatives at a time when supplies are disrupted in Yemen, Libya, Syria and South Sudan.

“There’s a desire in Saudi Arabia and the U.S. to control price volatility and reassure the market,” Sadad al-Husseini, founder of Husseini Energy consultancy in Dhahran, said in a phone interview on Feb. 29. That “is why Saudi is pumping near record levels. Releasing oil from the SPR would be one of the dumbest things to do. They are just saying that to try and bring prices down.” He is a former executive vice president for exploration and development at state-run Saudi Arabian Oil Co.

Saudi Arabia (OPCRSAUD) used 49 rigs in January, compared with 48 in December and 23 a year earlier, Baker Hughes, the world’s third- largest oilfield-services provider, said Feb. 7. The nation employed an average of 47 rigs in the fourth quarter, up from 39 in the previous three months. Rig use peaked at 57 in August 2007, as the country implemented a program to boost capacity to 12.5 million barrels a day.

The kingdom is producing 9.8 million barrels a day and has about 2.5 million barrels of spare capacity, Saudi Deputy Oil Minister Prince Abdulaziz bin Salman said during a visit to India last week, the same amount as Iran’s exports. The country boosted output to 10.047 million in November, the highest level since at least 1980.

‘Responding to Demand’ “The kingdom is responding to demand for more crude, and part of this demand is related to upcoming sanctions on Iranian oil,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said by e-mail on Feb. 27. “What could motivate a use of strategic stocks is the lost volumes of Syria, Yemen and South Sudan combined. Here you face actual supply disruptions, so the U.S. and the IEA may decide to release oil to bridge the gap as Saudi continues to pump more.”

China, Japan, India and South Korea, which together bought 59 percent of Iran’s oil in the first half of last year, are deepening ties with Saudi Arabia before U.S. sanctions against financial institutions against the Islamic republic take effect at the end of June. Chinese Premier Wen Jiabao, South Korean President Lee Myung Bak and Japanese Foreign Minister Koichi Gemba visited Riyadh this year to strengthen relations, while India asked for more oil on Feb. 23. tons more oil from Saudi Arabia next year.

‘No Need for Concern’ “The market is very much well supplied and there’s no need for concern,” Saudi Arabia’s Prince Abdulaziz said on Feb. 23 in New Delhi. “We have demonstrated to our friends here how much excess capacity there is today and how much capacity will be there in the future.”

Saudi Aramco is bringing the Dammam field, its oldest, back on stream this year, according to the Economist Intelligence Unit. The heavy crude is a “good” replacement for Iranian oil, said Caroline Bain, a senior economist at the London-based EIU.

“One explanation for reviving fields like Dammam is that the Saudis are currently overestimating their spare capacity, so they are drilling more as it looks like they may actually need to use it,” Bain said. “We estimate them to have about 3 million barrels a day spare currently, but perhaps the amount that’s readily available would be quite a lot less than that.”

“Releasing oil from the Strategic Petroleum Reserve would be, at best, a short-term benefit,” Senator John Barrasso, a Wyoming Republican, said in a statement Feb. 28. “This purely political move would cause more harm than good.”

“Saudi drilling is mostly independent of the use of the SPR because they act on different time horizons,” Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in London, said Feb. 27. “New rigs are going to have an effect in the medium-to-longer term, while the SPR is a short-term tool. The Obama administration has used the SPR before, so, if the circumstances were right, I wouldn’t rule its use out.”

The extra oil that they are exporting is heavy crude which most refineries can not refine or even they do not want to refine for technical and cost reasons. So I am thinking; are they selling this unwanted oil at a huge discount? Is there a link that can show me what the spread between Brent and Arab heavy crude?

I read somewhere that Saudis are thinking to burn this oil to generate power instead of selling with a huge discount to global market.

Any idea how this writer calculated the cost of oil extraction? Seems dubious to me

With oil prices seeking firm direction today – they were down slightly earlier, but turned positive around 11:30 a.m. – it might be worth thinking about how much it costs to produce the stuff.

Investment bank Sanford C. Bernstein looked at non-OPEC crude oil producers outside the former Soviet Union, and concluded that the marginal cost in 2010 was $83. U.S. oil prices spent much of that year below that level, though they were well above $90 by year-end.

Further, the bank’s analysts, led by Neil Beveridge, say initial 2011 data suggest the marginal cost had likely climbed near to or above $90. U.S. oil prices were well above $90 for most of the year, and went up to nearly $114, except for a stretch between early August and late October when they were largely below that level. Brent crude prices, which reflected what many buyers were paying, were even higher.

Now, they concluded, oil prices are 1.35 times the marginal cost of production. That may be good news for the profits of big and efficient oil companies. But, judging from what Mr. Beveridge and his colleagues have to say, the current oil rally – U.S. prices are up more than 8% this year – may be vulnerable.

“We think the marginal cost oil prices are unjustified relative to fundamentals,” they wrote. “While there is clearly in ‘Iran’ premium built into prices, ultimately high prices will squeeze out marginal demand and result in oil prices correcting lower.”

misterno wrote:The extra oil that they are exporting is heavy crude which most refineries can not refine or even they do not want to refine for technical and cost reasons. So I am thinking; are they selling this unwanted oil at a huge discount? Is there a link that can show me what the spread between Brent and Arab heavy crude?

That measures Brent against Dubai, which is currently around a $4.75 a barrel spread. It looks like this spread varies from around $2 to $8. Arab heavy(SOSPAHAS) typically sells slightly cheaper than Dubai, but that can give you a rough idea. Looks like Arab heavy is currently around $0.85 cheaper than Dubai. So if I am reading this correctly and my math is right, it looks like the total spread between Brent and Arab heavy looks to be around $6.00. Not as high as I thought it would be.

Brent crude rose to an 11-week high compared with Dubai oil, even as the Mideast benchmark gained. The April Brent-Dubai (PVMMDBSP) exchange for swaps, which measures the European benchmark contract against the Middle East grade, rose 5 cents to $4.30 a barrel, the highest since Nov. 28 and the third day of increases, according to PVM data. The May contract was also up 5 cents, to $4.10.

misterno wrote:Any idea how this writer calculated the cost of oil extraction? Seems dubious to me

Well, the author is talking about the marginal cost of oil. That is the cost of bringing an additional barrel of oil online. He is not talking about average costs of oil currently being produced. Naturally, new oil is going to be more expensive than current oil as we go for the cheap and easy stuff first and save the expensive and hard stuff for someone else. And he states he is not talking about OPEC or Russian oil, which is much cheaper than other sources of oil. Also, marginal costs are full life cycle costs, not just extraction costs. Marginal costs are going to be higher than extraction costs. For example, cheap middle east oil may have extraction costs of around $10 a barrel. Marginal costs are closer to $20 a barrel. Here is an example of extraction costs alone:

and some numbers on marginal costs around the world:

In Saudi Arabia, home of the world's cheapest oil, producers face a full life cycle (that is, including amortisation and cash costs) marginal cost of US$20 per barrel. In Russia, it's about US$25.

North Sea fields have a marginal cost of about US$60 while the new deepwater discoveries off the Brazilian coast are expected to cost US$70 per barrel.

Deepwater production from Angola and Nigeria, considered (along with offshore Brazil) to be exciting new frontiers, operate with marginal costs of about US$90 per barrel. And at US$100 per barrel and more, Canadian tar sands and unconventional sources come into play.

So marginal costs vary widely. And that article was from 2009. I think I read a more recent article that said some new technology and techniques have lowered the marginal cost for a barrel of oil in the tar sands. But it is good to give you a rough idea. And if you are talking those expensive ultra deep water projects or tar sands, The author in your article is in the same ball park as my numbers.

In Saudi Arabia, home of the world's cheapest oil, producers face a full life cycle (that is, including amortisation and cash costs) marginal cost of US$20 per barrel. In Russia, it's about US$25.

North Sea fields have a marginal cost of about US$60 while the new deepwater discoveries off the Brazilian coast are expected to cost US$70 per barrel.

Deepwater production from Angola and Nigeria, considered (along with offshore Brazil) to be exciting new frontiers, operate with marginal costs of about US$90 per barrel. And at US$100 per barrel and more, Canadian tar sands and unconventional sources come into play.

So marginal costs vary widely. And that article was from 2009. I think I read a more recent article that said some new technology and techniques have lowered the marginal cost for a barrel of oil in the tar sands. But it is good to give you a rough idea. And if you are talking those expensive ultra deep water projects or tar sands, The author in your article is in the same ball park as my numbers.

I am not saying you are wrong. It is just that the idea of "marginal cost being $90/brl" makes me uncomfortable. If this is true, then the price of oil can NEVER go below this level. If it does, then all the producers with this cost will stop producing. But then who will supply 8-9 billion people some of which live in economies growing close to %10 a year. I am hoping that this writer is wrong in his calculations/data/research.

I am not saying you are wrong. It is just that the idea of "marginal cost being $90/brl" makes me uncomfortable. If this is true, then the price of oil can NEVER go below this level. If it does, then all the producers with this cost will stop producing. But then who will supply 8-9 billion people some of which live in economies growing close to %10 a year. I am hoping that this writer is wrong in his calculations/data/research.

not exactly. The marginal cost refers to what it takes to explore for and produce a new barrel of oil, not what it costs to "lift" a barrel in the ground with infrastructure in place. In SA, for example, the lifting cost is just a few dollars/bbl but the marginal cost is a lot higher (my guess based on what it cost them for the Mega-projects is it is somewhere around $50 or so, but just guessing). For SA the more important figure to understand is that because they count on oil for almost all of their income they actually require around $80 to balance their budget.

So producers can continue to produce below marginal cost as long as they are still above operating cost (essentially lifting cost), they just can't afford to bring new production on stream.

misterno wrote:[I am not saying you are wrong. It is just that the idea of "marginal cost being $90/brl" makes me uncomfortable. If this is true, then the price of oil can NEVER go below this level. If it does, then all the producers with this cost will stop producing. But then who will supply 8-9 billion people some of which live in economies growing close to %10 a year. I am hoping that this writer is wrong in his calculations/data/research.

Well never say never, with a worldwide depression and a major drop in demand it can and probably will drop well below $90 for a while and perhaps more then once. Over reasonable periods of time though it is going to average above $90 or whatever the actual marginal cost is from now on. If it is not $90 today it soon will be. Welcome to Peak oil or at least peak cheap oil.

I would first check JODI. This information is based on what the country reports, so it might not be entirely accurate. Also, it is usually about 2 months behind, so we will not get to see if they really hit 11 MMbd in Feb for awhile yet.

If you think the country is lying, you could check the IEA instead. They do their own estimates.

Saudi Arabian crude supplies in January were unchanged at 9.85 mb/d. Saudi Arabia has increased output by 400 kb/d since last October, with some of the extra volumes going to China.

In this case, the Jodi and IEA data are about the same. They are both reporting Saudi crude oil production at around 9.8-9.9 mb/d. They don't have data for Feb yet though. But we should not have to wait too long for the official data to come out.

kublikhan wrote:I would first check JODI. This information is based on what the country reports, so it might not be entirely accurate. Also, it is usually about 2 months behind, so we will not get to see if they really hit 11 MMbd in Feb for awhile yet.

If you think the country is lying, you could check the IEA instead. They do their own estimates.

Saudi Arabian crude supplies in January were unchanged at 9.85 mb/d. Saudi Arabia has increased output by 400 kb/d since last October, with some of the extra volumes going to China.

In this case, the Jodi and IEA data are about the same. They are both reporting Saudi crude oil production at around 9.8-9.9 mb/d. They don't have data for Feb yet though. But we should not have to wait too long for the official data to come out.

I am looking at your first link and I am seeing that China's production is going down steadily.

They are most needy for oil at this time and you would think that they would use whatever necessary to pump up the production. Use water or nitrogen, that is what I would do unless of course you would think that oil price will go up even further. But then most of their production is in inner China where they would not be able to find water like SA is pumping from the ocean. So I guess China hit PO already.

kublikhan wrote:I would first check JODI. This information is based on what the country reports, so it might not be entirely accurate. Also, it is usually about 2 months behind, so we will not get to see if they really hit 11 MMbd in Feb for awhile yet.

If you think the country is lying, you could check the IEA instead. They do their own estimates.

Saudi Arabian crude supplies in January were unchanged at 9.85 mb/d. Saudi Arabia has increased output by 400 kb/d since last October, with some of the extra volumes going to China.

In this case, the Jodi and IEA data are about the same. They are both reporting Saudi crude oil production at around 9.8-9.9 mb/d. They don't have data for Feb yet though. But we should not have to wait too long for the official data to come out.

I am looking at your first link and I am seeing that China's production is going down steadily.

They are most needy for oil at this time and you would think that they would use whatever necessary to pump up the production. Use water or nitrogen, that is what I would do unless of course you would think that oil price will go up even further. But then most of their production is in inner China where they would not be able to find water like SA is pumping from the ocean. So I guess China hit PO already.

If China were clever and the long-term thinker that some seem to give them credit for being, they would conserve the resources located within their borders and seek to obtain energy from imports while the energy is as cheap as it is (and as long as countries were willing to export). If they succeed in depleting the rest of the world first while they still have resources then they would be in an advantageous position.

Okay fresh news arrivedSaudi Arabia oil production went down to 9.8MMBD in Feb 2012 same as Jan 2012. The question is; is this reduction intentional or it is just they can not keep pumping 10.04MMBD like they did back in Nov 2011.

And why is Brent Oil broke a record reaching $126 at a time when Saudi Arabia pumping in record amounts. Something does not make sense here...

Is this because of speculation or SA can not increase exports as much as Iran used to export?

So you can't trust the KSA numbers on what they export? All the oil they export ends up a a refinery somewhere and they keep accurate books on what was purchased from whom and what they payed for it. probably shows up in quarterly reports to stock holders and in annual audits. Shouldn't be too hard to figure out what they really are sending out via super tanker and pipeline.